What does the IRS mean by not allowing “private benefit” in a fund raiser?

Rich, a fellow CPA, wrote:

I do very little with the non-profit world these days. Our group has a
fundraiser which raises a fair amount of money (for us) $600-$1000. The
question is in regard to spending the money. Does the money have to be
spent on group activities as a whole, or can it be used to for individual
educational activities (i.e. worldview camps, etc)? In a nutshell, the
question is what constitutes private benefit/private inurement?
Thanks,
Rich

Rich,

Good questions and difficult to answer in a nutshell, but I’ll try!
Does the money have to be spent on group activities as a whole Yes, it does.

can it be used to for individual educational activities (i.e. worldview camps, etc) No; that would be inurement to the individual.

what constitutes private benefit/private inurement?

From the IRS (GCM 39862 (11/22/91)):

“Inurement is likely to arise where the financial benefit represents a transfer of the organization’s financial resources to an individual solely by virtue of the individual’s relationship with the organization, and without regard to the accomplishment of exempt purposes.”

Translation from IRS-ese to plain English: Inurement is when a group transfers some of its money to specific individuals. The individuals benefit just because they are members of the group and not because it represents the purpose of the organization.
In other words, a homeless person can benefit by receiving a meal from a charity whose purpose is to feed the poor. A family cannot fund their own child’s educational activities (worldview camp) just because they are a member of a parent booster club or a homeschool group. The benefit is supposed to be to the group (or a clas of people, i.e., the homeless) for its tax-exempt purpose, not to specific individuals.

And this from the IRS, again (1993 EO CPE Text ATHLETIC BOOSTER CLUBS: ARE THEY EXEMPT? by Debra Cowen and Gerald Sack)

“In fact, the earnings of the organization are being used directly and specifically to pay for benefits to specific individuals rather than to a class (of competitive gymnasts) as a whole. ”
“Inurement of income is strictly forbidden under IRC 501(c)(3) without regard to the amount involved. Violation of the inurement proscription is sufficient to defeat exemption.”

Translation: A gymnastics booster club was sharing it earnings with specific individuals. The IRS defines that as inurement or private benefit. Inurement is a serious issue in the eyes of the IRS and an organization can lose its tax exempt status for benefiting a specific individual with money meant for the group.
I hope that helps!

Carol Topp, CPA

Comments

  1. How far does this extend? For example, let’s say a non-profit home school organization offers several athletic and academic activities. The football team fundraises, and the organization credits those funds to the football team’s account, for use by the football team (for equipment, field rental, etc.). Is this considered inurement, since the funds don’t benefit the organization as a whole, but just the football team?

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